Ask Matt: Must companies 'go public?'

A: Companies can stay private as long as they wish. But once they start amassing hundreds of shareholders, at some point, most companies figure they may as well sell shares to the public.

The issue at hand is the so-called “500 shareholder rule.” Remember companies are free to issue private stock that doesn’t trade on an exchange, like the New York Stock Exchange. This private stock is beneficial for young companies, since it makes employees feel empowered by giving them ownership.

But there’s a potential snag: Once companies have 500 or more people who own stock that are not considered “accredited,” the Securities and Exchange Commission requires the company to meet financial reporting requirements. Accredited investors are defined as those with the knowledge and resources to understand the risks. If a company is going to meet financial reporting rules, and take on the associated costs, most figure they should just sell shares to the public in an initial public offering.

It was the 500 shareholder rule that coaxed Google to launch its IPO in 2004. The same is said to have prompted Facebook to sell shares to the public, too.

With that said, there’s no requirement for a company to list shares on an exchange. There are plenty of massive companies, like Cargill, computer maker Dell, and candy maker Mars that are private.

USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or @mattkrantz on Twitter.